Uruguay feeling Argentine woes

The stately Carrasco Hotel-Casino dominates Montevideo's long riverfront esplanade. Until recently, the ornate hotel remained a showpiece of South America's last major government-run economy.

Since its inauguration in 1921, the 118-room French-style building was the property of the city of Montevideo, Uruguay's capital. Everyone from the tuxedoed waiters to roulette attendants was a municipal worker.

Though the city-run casino is still in business, the hotel is closed. Next year, a private consortium will reopen the Carrasco as a Marriott hotel, helped by $18 million in government tax breaks.

This move toward privatization shows how times are changing here, in large part because of the financial crisis in neighboring Argentina, which is being felt across the increasingly interlinked region. From trade to tourism, Brazil, Paraguay, and Chile have felt the impact of the Argentine collapse.

Brazil has started to stagger under its tremendous debt load. In addition to Argentina's chaos, uncertainty about the outcome of October presidential elections is scaring investors as foreign capital inflows are waning. Exports to Argentina have shrunk dramatically. This month, Brazil's currency stumbled to a six-month low against the dollar.

Paraguay has lost the hordes of Argentine shoppers that came to load up on cheap, untaxed consumer goods.

Shriveling Argentine business has hurt important Chilean companies like the Falabella department store chain, one of several to expand across the Andes in recent years.

But Argentina's problems are being felt most acutely in Uruguay, which was already laboring under a four-year recession. Argentine tourists no longer flock to Uruguay's beach resorts and casinos. And their expatriate capital has drained away from Montevideo's famously secretive banks.

Last month, Uruguay's President Jorge Batlle announced unpopular new taxes in an attempt to shore up the country's finances. On Monday, he came under fire for calling Argentine leaders "a bunch of thieves," referring to alleged corruption that has contributed to the economic crisis there. He will be flying to Buenos Aires mend the two countries' typically good relations.

For now, Uruguay, the small beef- exporting nation wedged between Brazil and Argentina, stands as a throwback to the time when phone companies, gas stations, and even casinos in Latin America were state-run. And while other countries' belt-tightening reforms have ravaged social safety nets, Uruguay's welfare system has remained generous.

But Uruguayans are being forced to reconsider the costs of their government. Many fear their nation also may stand on the edge of economic disaster.

Hanging in the balance is the identity of Uruguay's small society, characterized by European-style benefits. One in six Uruguayans works in the public sector.

Last week, the International Monetary Fund and World Bank promised Uruguay $1.5 billion, but many say that's not enough\ and that there are few alternatives to gutting state-owned companies and government ministries.

"There is a consensus that government costs need to be reduced, but not on how," says Adrian Fernandez, economist at the independent Economic Research Institute in Montevideo.

Batlle has long argued the solution to Uruguay's moribund economy is liberalization, alleviating costs by allowing competition and private investment.

Convincing Uruguayans of the wisdom of this strategy is tricky. Most here consider the statist model as the ballast that has ensured Uruguay's relative economic stability.

An overwhelming majority of Uruguayans still oppose the large-scale privatization schemes that reigned in the freewheeling Latin America of the 1990s, especially in Argentina, says Agustin Canzani of the Equipos Mori polling firm. "Argentina is the mirror in which we sees ourselves," he says. "Argentina's privatization process is seen very critically. It doesn't offer a lot of arguments in its favor."

However, Canzani is careful to distinguish between full-scale privatization and mixed models. These hybrid deals, combining private and public initiative, may soon gain the support of a majority as a compromise, he said.

That already has started to happen. The leftist city government approved the 1999 sale of the Carrasco Hotel's operating rights. Batlle has successfully opened the cellphone market and parts of the energy market to competition, and the natural gas market and railroads to private investment.

The government's market-friendly posture has drawn the ire of many leftist supporters. Says Amparo Mello, a university student: "If it was up to Batlle, he would sell everything off, privatize everything, and we'd be another Argentina – we'd have nothing left."

So far, Batlle's limited reforms haven't helped. Uruguay's unemployment rate hovers near 15 percent, and the economy will shrink by more than 2 percent this year. The recession has bankrupted thousands of small businesses. Montevideo, once a solid middle-class city, has growing shantytowns.

Omar Deliotti and his son, Omar Jr., have been unemployed since their 35-employee shoe factory went bankrupt in 1998. They converted the factory to apartments they now rent out. Every afternoon, they play handfuls of 10-peso chips at the roulette wheel, hoping to make some easy money for groceries.

"This is just a little job, something to do," said the elder Deliotti. "But at least here you can come away with something. Out there, there's nothing left. There are thousands of businessmen like me. Everybody went broke."